UK Edition
Bigger than Brexit: OECD takes aim at Britain’s productivity crisis and the Government's plans to tackle it
Britain’s productivity crisis is bigger than Brexit. It has been going on for longer. It will be here long after Brexit is settled. And it is hitting us all in the pocket, every working day.
“It is nothing to do with Brexit, it doesn’t even have to do with the [financial] crisis - it was already happening as we approached the crisis,” says Jose Angel Gurria, the secretary general of the Organisation for Economic Co-operation and Development (OECD), noting that most rich countries are suffering too, but the UK is doing particularly badly.
“It is a structural issue in the UK, and the fact that you are in good company should not give you consolation because you still have to address it.”
“Let us focus on what is going to provide the prosperity and the better wages and the competitiveness of the UK economy, and that is getting productivity back on its feet.”
He has published a long list of ways to try to solve the problem.
None of it will be easy. Some of it will be expensive. And, in a whole host of areas, the economists have warned that the British Government is on the wrong track.
U-turns
Core policies are pushing the UK in the wrong direction and should be scrapped, the OECD believes.
Taxes and spending should be entirely reviewed. More cash should go to key areas such as transport infrastructure and research and development.
The OECD believes that, with some tax rises, the Chancellor could spend as much as 1.25pc of GDP on new productivity-boosting reforms - approximately £24bn - and still hit his target of cutting the deficit to below 2pc of GDP in 2020.
Mr Hammond has made clear he intends to continue with the deficit reduction plan, however, which limits his room to spend more money - so this review would represent a major change of course.
Cutting migration is also mistaken, the OECD argues.
“Immigration has enhanced living standards through higher labour resource utilisation and productivity gains, which shows the critical importance of keeping the labour market open for foreign workers,” its report said.
The Government’s plans to hike the minimum wage could end up harming low-paid workers, not helping them.
“The planned pace of increases may be too steep given the ongoing economic slowdown, with a risk that low-skilled workers are either priced out of employment or that employers push them into self-employment, which is not subject to minimum wage regulations,” the report warned.
Policies on housebuilding, meanwhile, are woefully lacking in ambition - the OECD wants an overhaul of the Green Belt.
“A careful reassessment of the overall economic costs and environmental benefits of maintaining the Green Belt is needed, including alternative ways to preserve or create green space, more integrated in the cities (parks) rather than around them,” the OECD’s report said.
As well as easing the enormous pressure on the pockets of renters and first-time buyers, that would also make it easier for workers to move around the country to get the best jobs, Gurria believes.
U-turns on U-turns
In a potential embarrassment for Theresa May and Philip Hammond, the economists also call for a reversal of some U-turns from earlier this year.
The analysts want to see a hike in national insurance on the self-employed, arguing that such workers make up a growing share of the workforce and must be taxed as highly as employees to protect Government revenues.
When the Chancellor tried that earlier this year an outcry forced him to scrap the policy.
Similarly the OECD wants to abandon the triple lock on pensions, which ensures retirees’ income rises by the highest of average earnings, inflation or 2.5pc per year.
It prefers a single lock, raising pensions in line with average earnings, saving money as the population ages. Yet that too is likely to be a non-starter. The Conservatives promised to turn it into a ‘double lock’ in the manifesto only to abandon even that more modest plan on the Government’s failure to win a majority.
North-south divide
Regional inequalities are particularly acute as areas outside London and the south east need extra support in boosting productivity and economic growth - and the economists believe the Government does have financial wiggle room to try to fix this problem.
“This should help to tackle the north-south productivity divide. We need to find ways of boosting local and regional transport infrastructure, research and development, housing, and skills, skills, skills,” Gurria said.
But he added that the Government has made some positive noises in this direction.
“When it comes to supporting workers with low skills I am pleased that the UK Government is working to develop a modern industrial strategy - this is timely,” he said.
Brexit
The OECD has long opposed Brexit - it still wishes the UK could reverse course and cancel the whole thing.
But it is worth remembering, when considering all of the OECD’s forecasts, analyses and prescriptions, that it was hopelessly wrong in its forecasts last year.
Before the vote the group cautioned that Brexit could even tip the entire global economy into a downturn, so fragile was the economy and so dangerous the idea of leaving the EU.
Yet now the world is surging ahead.
As Gurria says: “We are delighted that it didn’t happen.”
But the magnitude of the error makes it harder to believe every other warning he issues.